Just when it appeared the IRS Had Been Acquitted of Unfairly Targeting Tea Party Organizations, It Settles for $3.4 Million

By Tim Larason

A report last month by the Inspector General of the IRS was interpreted by some to acquit the IRS of unfairly targeting “tea party” and other conservative political organizations in its review of exempt applications. The report was based on a detailed review of tax exempt applications from 2004 through 2013. It found that applications from “progressive,” “green energy” and “acorn” organizations (generally liberal) were also being pulled for additional scrutiny. Most were asked for additional information and their applications were delayed or, in some cases, denied.

But now the Justice Department announced it has settled the lawsuits by tea party groups. It will reportedly pay $3.4 million and the IRS will admit its treatment of those organizations was “wrong.”

Activist organizations applied to the IRS for qualification for exemption social action organizations under Section 501(c)(4) or business leagues under 501(c)(6). Such qualified organizations can avoid the need to register under Section 527 as a political organization and disclose contributors. C4 and C6 organizations are not prohibited from political activities so long as that is not the principal purpose. Actually organizations can skip the application process and “self-declare” their C4 or C6 status on their first Form 990 annual return, but many organizations desired advance approval. An organization that first claims C4 or C6 status and is later determined not to be exempt faces a huge fine for non-filing or late filing as a political organization under Section 527. But there is no personal liability so operators eventually found they could self-declare an organization, spend all the contributions and find a friend to form a new one for the next political campaign.

A tax lobbyist for Public Citizen commented on the Inspector General report: “This report shows the IRS deep scrutiny of political groups is in fact bipartisan…” The report does not go so far as to say that liberal organizations were subject to the same amount of scrutiny as conservative ones, but that is probably just the result of many more applications from tea party organizations.

The IRS has been stripped of funding and has been forced to make two changes. Applications have been simplified and are generally approved quickly. Audits of exempt organizations, which would include a review of actual operations, always infrequent, have been further curtailed. A recent Tax Court decision (Creditguard of America, credit counseling) upholds revocation of an exemption for failure to operate as promised retroactive to beginning of the examination period in 2002. A tax of $212,000 was assessed for 2002 and the court held interest would run from 2002, 15 years of interest accruals. I suspect only a fraction of the C4 or C6 filings will be audited by the IRS. I’ve only heard of one and know of returns which show a majority of the revenue went to political activities which have not been audited. C4 and C6 organizations are required to release their annual Form 990 filings with details of expenditures; one I reviewed showed 58% of $620,000 of revenues went to obviously political organizations. A token $25,000 was donated to Myriad Gardens. I could be a whistle blower but my award would be based only on what is actually collected by the IRS, probably nothing since the organizations have been abandoned and there is no personal liability for the organizers.

Audits are also down of religious organizations claiming exemption under 501(c) (3) where contributions are tax deductible. President Trump has instructed the IRS to not enforce the “Johnson amendment” which prohibits organizations claiming C3 status from participating in a political campaign. It has been rarely enforced in the past and will probably not be enforced so long as Trump is president, but perhaps thereafter.

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